The recent rebound for small cap stocks could possibly grow into a more sustained rally if former President Donald Trump wins a second term, according to Goldman Sachs. The Russell 2000 gained 6% last week, its best week of the year, and looks poised to rally further on Monday. The iShares Russell 2000 ETF (IWM) was up 1% in premarket trading. IWM 5D mountain Small cap stocks are coming off their best week of 2024. A cool consumer price index report last week was seen as a major catalyst for small caps, as it suggested interest rates could go lower. Additionally, Goldman Sachs chief U.S. equity strategist David Kostin said in a note to clients that the group is seen as potential beneficiary of a win by the presumptive Republican nominee in November. “Many investors view small caps as a potential ‘Trump trade,’ but the path for small cap outperformance is a narrow one,” the note said. Trump’s betting market odds of winning the election have steadily climbed in recent weeks since the debate against President Joe Biden in June. As of Monday morning, PredictIt showed roughly 66% odds of a Trump win. Kostin said that small caps outperformed after Trump’s 2016 election, but that was when interest rates were much lower. Rates could be key for the group going forward, regardless of who wins in November. “For small caps to outperform, post-election policy would have to meaningfully improve the outlook for economic and earnings growth without putting upward pressure on rates,” the note said. Trump does not have highly detailed policy proposals for a second term, but hiking tariffs while lowering taxes and regulation could be a boost for domestic stocks, including small caps, according to the note. “On net, it seems unlikely that the election outcome will have a major impact on the trajectory of the aggregate US equity market,” Kostin added. The Goldman note was published before the attempted assassination of Trump on Saturday.
